According to the text, there are three levels that political risk encompasses. And they are firm specific, country specific and global specific risks. Starbucks is considered a thriving global enterprise. Although Starbucks has successfully entered, penetrated, and saturated many global markets, not all attempts have been successful. Starting in 1996, Starbucks has hastily moved into 41 countries fruitfully. However, Starbucks had to pull out of Israel market after opening only 6 stores.
According to our research (Richey, Brenda, July 2006), the following will describe Starbucks unsuccessful venture into Israel; the four main contributors to Starbucks failure in Israel: politics, location, pricing, lack of localization; and conclusions for future expansion. Firm specific Assessing the political stability of a country is only a first step. The real objective is to anticipate the effect of political changes on activities of a specific firm. Clearly, different foreign firms operating within the same country may have very different degrees of vulnerability to changes in host-country policy or regulations.
The firm-specific risks that confront MNEs include business risk, foreign exchange risk and governance risks. Starbucks attempted to enter the coffee penetrated market of Tel Aviv, instead of focusing on some of the less established areas. Also, they did not do their typical saturation arrival. They placed only six coffee shops into a market that already contained the chains of Arcaffe, Aroma, Ilan’s, and neighborhood shops. From their perspective, one can see how caution might have been a good decision factor, yet they have a proven success rate at how they establish locations.
Chief Financial Officer, Michael Casey, says tough competition is the problem. Country specific Political risk studies usually include an analysis of the historical stability of the country in question, evidence of present turmoil or dissatisfaction, indications of economic stability, and trends in cultural and religious activities. Analysis of trends in these metrics leads many to speculate that the future will resemble the past, which is often not the case. Despite this difficulty, the MNE must conduct adequate analysis in preparation for the unknown.
Country-specific risks include: Transfer Risk – limitations on the ability to transfer funds out of the country. Cultural and Institutional Risk – includes difference in allowable ownership structure, differences in human resource norms regarding labor laws and union contracts, differences in religious heritage, nepotism and corruption in the host country and intellectual property rights. The business environment in Israel, much like China, would not allow for Starbucks to be complete owners of their stores. They either had to franchise or enter into a joint venture.
Since Starbucks is against any form of franchising, they chose to enter in a business venture with Delek Group. This is not a new concept for Starbucks; they typically enter into most international ventures in the same manner. The difference was in the political environment. Numerous countries, including Israel, have large activist populations that do not support globalization. The Muslim and Jewish religions present in Israel promote conservatism. They do not like western society’s consumerism, liberalism, and free trade. To Israelis, Starbucks seems to be symbolic of the problems caused by globalization.
These countries believe that Americans are trying to force their culture, beliefs, and morals onto the developing countries they enter. Also, many Israelis and Palestinians resent Americans for getting involved in their civil war. To make matters worse, Howard Schultz involved himself by speaking politically about the situation in Israel. He spoke to an audience at a synagogue in Seattle, “asserting that the Palestinians needed to fight terrorism and that Jews were about to be faced with increased anti-Semitism” (Hahn, 2002). As a result, Israeli’s boycotted Starbucks.
When Starbucks removed themselves from Israel in April 2003, they stated that it was due to operational challenges and not the current economic and political status in the Middle East (Coussin, n. d. ). Starbucks was probably just trying to save their reputation by making this comment and did not want to sound offensive. “Globalization” is an invented term used to show a combination between the local and global approaches. In theory, they maintain the main features of the brand, but they modify it to meet the local cultures needs.
Starbucks should have looked at KFC’s failure entering is Israel as an example of what not to do. KFC did not realize that the slaughtering of chicken in Israel was totally different from other countries. On top of that, they were a kosher society that did not eat pork, so KFC attempted to adapt their pig gelatin chicken coating. A successful example that Starbucks should have followed was McDonald’s success in Israel. McDonalds understood that in Israel food was very important and they needed to adjust food preparation in order to be embraced.
They decided to grill their hamburgers instead of frying them (Coussin, n. d. ). Starbucks didn’t manage to adapt themselves to the regional coffee culture. Starbucks did not modify any of their existing beverages, food products, or pricing. They should have introduced unique food items like falafels, blintzes, and mandelbrot (Thompson, 2006). Global specific Global-specific risk is clearly quite difficult to predict (i. e. September 11th). There are many groups interested in disrupting MNEs operations for the cause of religion, anti-globalization, environmental protection, and even anarchy.
We can expect to see a number of new indices, similar to country-specific indices, but devoted to ranking different types of terrorist threats, their locations, and potential targets. Anti-Globalization Like most multinational enterprises (MNEs), Starbucks recognizes that it is an easy target for many anti-globalization attacks. And one of the main reasons is the criticism that the company is benefiting from lower-cost sourcing and for their unwillingness to help improve the economic conditions of the coffee growers Support government efforts to reduce trade barriers.
Although much effort had been initiated by Starbucks to counter these criticisms as will be detailed in the succeeding discussions, many are still wary that these actions are just for public image purposes. Cyber Attacks As given in the case, critics of Starbucks have utilized the power of the internet to air their concerns about the company. With the proliferation and continuous improvement of this technology, it won’t be surprising that the company will still be encountering such attacks.
There is no effective strategy other than internet security efforts and support for government anti-cyber attack efforts. Poverty Starbucks, among other coffee companies, promotes the growing of “fair trade” coffee, where farmers receive a decent and fair wage for their crops – so that they can live off of it. In its “Coffee Social Responsibility” brochure, Starbucks writes that it takes steps, including: “paying substantial premiums for all coffee purchases, long term contracts and affordable credit for farmers, direct purchasing, investing in social projects in coffee communities, and C. A. F. E. Practices buying guidelines. ” Additionally, Starbucks claims to be the largest North American purchaser of fair trade certified coffee. Starbucks obvious public PR issue forced them to deal with the problem before negative brand image association impacted their prestigious company. Their plan was to start participating in the Fair Trade, which means buying coffee from workers who are making a living wage. They publicly announced that they created a “Framework for a Code of Conduct” (Starbucks, 2006b).
This code stated that Starbucks would seek to buy coffee from growers who pay a decent wage and follow environmental practices. Environmental Concerns Aside from partnering with Conservation International, the company works projects on water development (ETHOS) and wildlife and natural resource preservation in Africa.